This year, you had until March 2, 2020, to contribute to your registered retirement savings plan (RRSP). If this seems longer than last year, it’s because the actual deadline falls on a weekend, so it gets bumped to the next business day.
What is the RRSP Contribution Deadline?
The RRSP contribution deadline in Canada is always 60 days past December 31st into the new year. This means that for your 2019 tax year, the contribution deadline, for either your own RRSP or to contribute to a spousal RRSP, is Monday, March 2, 2020. Next year the deadline will still be 60 days in, but the actual date may be different depending on what day it falls on.
Why Does the RRSP Contribution Deadline Matter?
The money you contribute to your RRSP is considered a tax “deduction”, meaning it reduces your taxable income; meaning that by contribution you will lower the amount of income that you will be taxed on. This can then lower the taxes you migh owe, or create a income tax refund.
However, contributing to your RRSP may not be in your best interest if you will end up paying more on it when you withdraw it then you would if you simply claimed the income now. In order to determine whether it’s better for you to contribute or not, consider what tax rate you would pay on the money if you claimed it now, versus what tax rate you anticipate you will be paying when you withdraw the money.
RRSP withdrawals count as income, and you have to pay income tax on them as you would now. The only difference is that you may have a significantly reduced income in retirement than you do now, which means you may end up paying less income tax on it.
A general rule of thumb is that those earning lower income now, not requiring the tax deduction, are better off investing in a tax-free savings account than an RRSP at first. However, you should look carefully into your own finances to determine which is better. You can use these extra 60 days in 2020 to look into your tax and financial situation for 2019 to determine which is best. In fact, the Canada Revenue Agency gives Canadians these 60 days of grace so that they can determine their 2019 income and determine their RRSP contributions. After all, your contribution limit depends on your income.
What is the RRSP Contribution Limit?
You will not be able to contribute more to your RRSP if you have already reached your contribution limit. That limit is either 18% of your taxable income for the tax-year, up to the maximum of $27,230 or your contribution limit balance as per your CRA My Account or Notice of Assessment.
Don’t forget that your contribution room carries over; room you didn’t use in previous years can be used this year and in subsequent years. This allows people who have gone through hard times to catch up with their investments, while still getting the benefits of contributing below the limit.
What about Contributing to A Spouse or Common-law Partner’s RRSP?
Another way to make RRSPs work better for you is to make contributions to your spouse’s RRSP. When the higher paid partner makes a contribution to the lower-earning spouse’s RRSP they effectively reduce their own deduction limit. While this may seem like a detriment, it can be a big benefit as lower-earning spouses will typically also pay less tax on the money when they withdraw it after retirement.
Your spouse or common-law partner’s RRSP can also help you get around age limitations. When you turn 71 you are no longer allowed to make contributions to your RRSP. However, so long as your spouse is under 71 you can still use your income to make contributions to the RRSP. This can help you lower the overall tax you’ll pay on that income.